Subbarao disappoints Chidambaram by refusing to cut key rates

Sharp differences came to the fore between Finance Minister P. Chidmabaram and Reserve Bank of India (RBI) Governor D. Subbarao on Tuesday as the central bank stuck to its hawkish monetary stance in refusing to reduce key rates.

While controlling inflation remains uppermost on Subbarao's mind, Chidambaram is in favour of lowering interest rates to spur growth.

An upset Chidambaram said, "Growth is as much a challenge as inflation. If the government has to walk alone to face the challenge of growth, then we will walk alone." The finance minister on Monday unveiled a five-year fiscal consolidation road map to show that the government is doing its bit to control inflation, which left headroom for the RBI to ease interest rates. However, Subbarao has not reciprocated the gesture.

"The government is doing its best to send a clear message that we are on the path of fiscal consolidation.

It is my hope that everyone will read and understand the government's commitment to path of fiscal consolidation," Chidambaram explained.

Chidambaram's disappointment was quite evident when he remarked, "Sometimes it is best to speak, sometimes it is best to remain silent. This is the time for silence." The RBI has lowered the cash reserve ratio (CRR), which determines the amount of cash banks have to park with the apex bank, by 0.25 per cent to 4.25 per cent.

The step by itself would make Rs 17,500 crore available to the banking system for providing fresh loans.

However, at the same time, RBI has increased the amount of money that banks have to set aside to back up restructured loans that could turn bad, which will keep funds out of circulation.

RBI leaving the policy repo rate unchanged at 8.00 per cent means the high interest regime, which has been choking demand and dampening growth, will continue.

State Bank of India chairman Pratip Choudhary does not see much merit even in keeping high interest rates to control inflation. Chaudhuri said, "I do not think the 13 rate increases that happened ( 2010- 11) helped in slowing inflation because today's inflation is largely due to cost push, and not so much demand pull." RBI said that it expects inflation, which hit a 10-month high of 7.8 per cent in September, to rise before easing in the final quarter of the fiscal year.

"While risks to this trajectory remain, the baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of 2012- 13," Subbarao wrote.

"The government is an important stakeholder in the Reserve Bank's policy. So, we understand that the finance minister has a position, he represents the government, and we have respect for what the finance minister says," Subbarao said in Mumbai.